Pay­ing for pro­duc­tiv­ity

One of the United States’ defin­ing – and dis­heart­en­ing – eco­nomic trends over the last 40 years has been real-wage stag­na­tion for most work­ers. Ac­cord­ing to a re­cent US Cen­sus re­port, the me­dian full-time male worker earned $50,033 in 2013, barely dis­tin­guish­able from the com­pa­ra­ble (in­fla­tion-ad­justed) fig­ure of $49,678 in 1973. Be­cause most house­holds earn the bulk of their in­come from their la­bor, the ab­sence of real-wage growth is a ma­jor fac­tor be­hind the stag­na­tion of fam­ily in­comes. The av­er­age fam­ily in­come of the bot­tom 90% of house­holds has been flat since about 1980. Real fam­ily in­come for the me­dian house­hold in 2013 was 8% be­low its 2007 level and nearly 9% be­low its 1999 peak.

Stag­nat­ing mid­dle-class wages and fam­ily in­comes are a ma­jor fac­tor be­hind the US econ­omy’s slow re­cov­ery from the 20072009 re­ces­sion, and pose a se­ri­ous threat to long-term growth and com­pet­i­tive­ness. House­hold con­sump­tion ac­counts for more than two-thirds of ag­gre­gate de­mand, and con­sump­tion growth de­pends on in­come growth for the bot­tom 90%.

The hey­day of US eco­nomic growth in the two decades after World War II was also a golden era for the mid­dle class. The long boom of the 1990s, when the US en­joyed sus­tained full em­ploy­ment, was one of few pe­ri­ods in the last 40 years when in­comes climbed at ev­ery quin­tile of the in­come dis­tri­bu­tion.

Many in­flu­en­tial econ­o­mists are now wor­ried that the US faces ane­mic growth and “sec­u­lar stag­na­tion,” owing to a per­sis­tent gap be­tween ag­gre­gate de­mand and full em­ploy­ment. Stag­nant mid­dle-class in­comes im­ply weak ag­gre­gate de­mand, which in turn means slack labour mar­kets and stag­nant wages for most work­ers. In the ab­sence of ag­gres­sive mon­e­tary and fis­cal poli­cies to support ag­gre­gate de­mand at fullem­ploy­ment lev­els, the re­sult is a vi­cious slow-growth cy­cle.

Two com­pet­i­tive­ness gu­rus, Michael Porter and Jan Rivkin of Har­vard Business School, re­cently warned that stag­nant mid­dle-class in­comes un­der­mine US com­pa­nies in sev­eral ways. “Busi­nesses can­not thrive for long while their com­mu­ni­ties lan­guish,” they cau­tioned. Un­less cor­po­ra­tions step up to the plate, “Amer­i­can business will suf­fer from an in­ad­e­quate work­force, a pop­u­la­tion of de­pleted con­sumers, and large blocs of an­tibusi­ness vot­ers.”

Porter and Rivkin are not call­ing on busi­nesses sim­ply to pay their work­ers more. In­stead, they are urg­ing busi­nesses to en­gage in a “strate­gic, col­lab­o­ra­tive” push to im­prove ed­u­ca­tion and train­ing to raise the skill lev­els of their work­ers.

That is a laud­able goal. But, as Porter and Rivkin find in their survey of business lead­ers, com­pa­nies of­ten dis­cour­age in­vest­ment in skills by their re­luc­tance to hire full-time work­ers. Nearly half of the re­spon­dents in­di­cated that, when pos­si­ble, they pre­fer to invest in tech­nol­ogy or out­source to third par­ties and hire part-time work­ers, none of whom re­ceive much ad­di­tional train­ing or have a stake in their company’s long-term suc­cess.

There is also a disturbing im­pli­ca­tion in the Porter-Rivkin survey that work­ers them­selves, along with Amer­ica’s schools, are to blame for wage stag­na­tion: If only work­ers were not so poor in math and sci­ence, so ill-equipped for the mod­ern world, and so un­pro­duc­tive, they would earn higher in­comes.

The re­al­ity is dif­fer­ent. US pro­duc­tiv­ity has been grow­ing at a re­spectable pace for two decades. The prob­lem is that pro­duc­tiv­ity gains have not trans­lated into com­men­su­rate wage in­creases for the typ­i­cal worker or in­come growth for the typ­i­cal fam­ily.

Ac­cord­ing to stan­dard eco­nomic the­ory, real wages should track pro­duc­tiv­ity. As Lawrence Mishel of the Eco­nomic Pol­icy In­sti­tute has doc­u­mented, this was the case from 1948 un­til about 1973. Since then, real wages for the typ­i­cal worker have flat-lined, while pro­duc­tiv­ity has con­tin­ued to climb. Mishel cal­cu­lates that pro­duc­tiv­ity in­creased 80.4% from 1948 to 2011, while me­dian real wages rose only 39% – almost none of the wage growth oc­curred dur­ing the last four decades.

True, highly skilled work­ers, es­pe­cially those with sought-after tech­nol­ogy skills and post­grad­u­ate de­grees, have fared much bet­ter. But that pros­per­ity has reached only a small elite. From 1979 to 2012, the real me­dian wage in­creased by only 5%. But real wages climbed 154% for the top 1% of wage earn­ers and 39% for the top 5%, while real wages stag­nated for the bot­tom 20th per­centile of work­ers and fell for the bot­tom tenth. In­deed, in­equal­ity in la­bor com­pen­sa­tion has been the largest driver of yawn­ing in­come in­equal­ity, ex­cept at the very top of the in­come dis­tri­bu­tion, where cap­i­tal in­come has been more im­por­tant.

Mean­while, cor­po­rate prof­its have soared. The GDP share of after-tax cor­po­rate prof­its is at a record high, whereas labour com­pen­sa­tion has plunged to its low­est share since 1950.

Strong pro­duc­tiv­ity growth is an im­por­tant pol­icy goal. But it is not enough to in­crease most work­ers’ wages or most fam­i­lies’ in­comes. Re­con­nect­ing pro­duc­tiv­ity gains and wage gains re­quires both pol­icy ac­tions, such as an in­crease in the min­i­mum wage with a link to pro­duc­tiv­ity growth, and changes in cor­po­rate hu­man-re­sources prac­tices, such as broader re­liance on profit-shar­ing pro­grams.

Such pro­grammes have in­tu­itive ap­peal. Em­ploy­ees who have a di­rect stake in a company’s prof­itabil­ity are likely to be more mo­ti­vated and en­gaged, and turnover is likely to be lower. This in­tu­ition is con­firmed by em­pir­i­cal re­search.

Some 20 years ago, Alan Blinder of Prince­ton Univer­sity cor­ralled a num­ber of econ­o­mists, in­clud­ing me, to ex­am­ine ex­ist­ing stud­ies on the link be­tween prof­it­shar­ing and pro­duc­tiv­ity. The over­whelm­ing majority of the stud­ies found a strong pos­i­tive ef­fect. Shared Cap­i­tal­ism at Work, a re­cent book edited by Dou­glas Kruse, Richard Free­man, and Joseph Blasi, con­firms this con­clu­sion with more re­cent ev­i­dence.

Var­i­ous forms of profit-shar­ing – in­clud­ing grants of op­tions and re­stricted stock, an­nual profit-based bonuses, and em­ployee stock­own­er­ship plans – have been grow­ing as a share of labour com­pen­sa­tion since the 1960s. But most work­ers are not cov­ered by such plans, and the big­gest ben­e­fi­cia­ries have been CEOs and top man­agers, a sig­nif­i­cant frac­tion of whose pay is tied to pro­duc­tiv­ity, as re­flected in prof­its and stock per­for­mance. Such in­cen­tive pay schemes have driven the out­size in­creases in com­pen­sa­tion for the top 1% of the wage and salary dis­tri­bu­tion.

Amer­ica’s long-run liv­ing stan­dards and eco­nomic com­pet­i­tive­ness de­pend not just on pro­duc­tiv­ity growth, but also on how that growth is shared. More eq­ui­table shar­ing of prof­its with Amer­ica’s work­ers and their fam­i­lies would do much to ad­dress the wor­ri­some stag­na­tion of wages and mid­dle­class in­comes in re­cent decades.